To Fix Housing, Fix Finance

Although there were many factors and actors to blame for the 2008 financial crisis, the subsequent Great Recession, and the current economic lethargy, there is little disagreement that housing was (and still is) at the center of the bubble. Rarely a day goes by without some grim housing news: most recently, “Mortgage Delinquencies Increase,” “Mortgage-Fraud Reports Up 88%,” and “New-Home Sales Sink To Lowest in Six Months.” Until the housing (and job) market recovers, the larger economic recovery will remain stalled. How housing is financed — and the role of the government in that system — is a question that must be addressed by policy makers, and soon.

Fannie Mae and Freddie Mac, the two government-sponsored enterprises that together hold more than $5 trillion in accumulated mortgage risk, were forced into a Treasury conservatorship in September 2008. In order to avoid losses on the mortgage-backed securities that had been issued by these institutions, and a complete implosion of the mortgage market, American taxpayers may be on the hook for up to $224 billion by the time this housing finance chapter is written. There was really no other choice: Private sector financial institutions were not and are not currently able to provide sufficient new mortgage finance or to refinance old mortgages at lower interest rates, so Fannie and Freddie (and the Federal Home Loan Banks) are almost the only game left in town supporting the ailing mortgage market. Ironically, as the GSE model failed, government action to save the housing market from collapse gave the GSEs an even larger stake. Their market share has swelled substantially since the housing bubble burst.

Now that the financial crisis is somewhat subdued, it is time to carefully rethink the structure and function of the GSEs. The new volume, The Future of Housing Finance, which I edited, aims to set out alternative views of what should be the right role for government in the housing and mortgage market going forward and how Fannie and Freddie might or might not fit into that role. A range of views is presented, including from those that believe the GSEs should be phased out as soon as possible, and those that continue to see a role for government in the mortgage market in the future.

The goal of these papers is to show that there is some agreement, despite ideological differences, on where to take the GSEs in the future.

There is concurrence that the federal government has an appropriate role in stabilizing housing finance markets and assisting low- and middle-income home buyers but that the government has been doing too much in this area and doing it too expensively; it should step back and let the private markets do more.

They also agree that mixing credit guarantees and affordability efforts was a mistake; going forward, the authors say the housing affordability mission should lie with the Federal Housing Administration, the Department of Housing and Urban Development, and similar entities. Also, any government credit guarantees, apart from the affordability mission, should be priced explicitly at “actuarially fair” rates and not be provided implicitly at zero or low cost, as before. Any private credit guarantors with government backing should be severely limited in their ability to own substantial portfolios of mortgages or related securities.

In addition, there is agreement that any government housing subsidies should be calculated accurately and recorded in the federal budget. And finally, a multi-year period is needed to transition from the current housing finance regime to any of the proposed ones—housing finance is too troubled and the GSEs are too important to reform immediately, although the decision-making should go forward even if full implementation should be slow.

Congress and the Obama administration must continue to try to figure out “what to do about the problem of housing.” The problem isn’t going away. Let’s hope they tackle it in the near future in a sensible way.